No He Can’t! Why Obama Won’t Tax Bank Bonuses

The chances of the U.S. following the U.K. in imposing punitive taxes on bank bonuses appear to be slim to none. “You’ll see politicians talk about it, but they won’t actually do it,” a senior investment banker told the Wall Street Journal today. Earlier this year, when the furor over Wall Street greed was at its height, Congress actually considered such a move but quickly backed away from it.

What nobody has explained is why the Obama Administration and Congress are so skittish about doing something that would be highly popular, and which also has sound economics behind it. As Clyde Prestowitz, president of the Washington-based Economic Strategy Institute and a former senior official at the Commerce Department, said to Bloomberg, a U.S. bonus tax is a “great idea” that is justified by the taxpayer-funded bailouts. “Goldman Sachs and the others may be making tons of money but they wouldn’t be making anything without the bailout, which saved them,” Prestowitz said. “There’s a lot of pain and agony out there because of their malfeasance.”

Here’s my two cents worth as to why it ain’t going to happen:

Cognitive capture. In Calvin Coolidge’s day, people in Washington believed that what was good for General Motors was good for America. Today, many insiders, including some of Obama’s economics advisers, believe that what is good for Goldman Sachs and Citigroup is good for America. The guts of this (dubious) argument is that we don’t manufacture very much these days and our competitive advantage is in things like entertainment, information technology, and financial engineering. Therefore, anything that hobbles Wall Street threatens the future prosperity of the country.

Financial capture. Let’s face it, Obama and the Democrats raised tons of money from Wall Street and Silicon Valley, both places where stock options and big bonuses are a way of life. To turn around and impose a fifty per cent surtax on the donors and fundraisers that helped to finance last year’s victorious Presidential campaign would be a risky move going into another election cycle—one in which the Republicans could well regain control of Congress. At least, that is how the White House and DNC bigwigs would see it.

Centrist capture. Obama is a prisoner of his own moderation. When faced with a choice, he instinctively hews to the middle ground. Since imposing a punitive surtax appears to be a proposal out of left field, he will react against it. The only way he would go for it is if it were presented to him as the middle option between doing nothing and lining up the bankers and shooting them. Since nobody except the odd straggler from the Red Brigade has proposed the latter option, the idea of taxing bank bonuses fails to meet the centrist criterion and is likely doomed.